Just wanted to clarify a few points about the equity method. Say I own a quarter of some company A. Their net income is 40 and dividends paid is 10. How are those dividends treated under the Income statement? I know I normally report a quarter of their net income. In this case I would also deduct a quarter of the dividend to arrive at the correct amount to put on the income statement? Which in this case is 7.5 Thanks
Under the equity method you do not report dividends received on the income statement; they merely reduce the investment in the subsidiary on the balance sheet.
Thanks. So in my example the net income for my company would increase by 10?
On your income statement you’ll show Income from Affiliate, 10 (= ¼ × 40). Dividends don’t enter into it.
Yes, you should report in the income statement an income of $ 10 ($40/4) following the Equity method. Dividends are not considered.
Dividends are only considered in the income statements for Financial Assets (AFS, TFV).
How will the parent balance sheet balance? It will record $10 in its income statement and (let’s assume the parent itself pays no dividend for the sake of simplicity) this will go to retained earnings and increase equity by $10. On the asset side of the BS though it will report $10-dividend of $2.5= $7.5 (again for the sake of simplicity assuming BV of the investee net assets= FV at the time of the acquisition, so no addl depreciation etc). Any thoughts?
ugh of course dividend received also increases the cash of the parent by $2.5… so it balances. It’s getting to me 